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A Comparative Analysis of the Financial Ratios of Listed ...

International Journal of Business and Social Science Vol. 3 No. 21; November 2012 173 A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011 Florenz C. Tugas, CISA, CPA Ramon V. del Rosario College of Business De La Salle University Manila, Philippines Abstract Most Financial statement analyses focus on firms belonging to industries that either contribute significantly to economic figures or posit in a highly competitive business environment. Whatever the motivation may be, Financial statement Analysis should be made available to all industries for reasons of comparability and benchmarking.

approached to assessing management’s effectiveness in generating sales from investments in assets. The fixed assets turnover considers only the firm’s investment in property, plant, and equipment and is extremely important for a capital-intensive firm. The total assets turnover measures the efficiency of managing all of a firm’s assets

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Transcription of A Comparative Analysis of the Financial Ratios of Listed ...

1 International Journal of Business and Social Science Vol. 3 No. 21; November 2012 173 A Comparative Analysis of the Financial Ratios of Listed Firms Belonging to the Education Subsector in the Philippines for the Years 2009-2011 Florenz C. Tugas, CISA, CPA Ramon V. del Rosario College of Business De La Salle University Manila, Philippines Abstract Most Financial statement analyses focus on firms belonging to industries that either contribute significantly to economic figures or posit in a highly competitive business environment. Whatever the motivation may be, Financial statement Analysis should be made available to all industries for reasons of comparability and benchmarking.

2 So much so to industries that silently propel economic development and growth, of which the education subsector is. In the Philippines, there are only three Listed firms in the education subsector. These are Centro Escolar University (CEU), Far Eastern University (FEU), and iPeople, Inc. (Malayan Colleges). This research paper aims to analyze the Financial statements of these three firms for three periods (2009, 2010, and 2011) using liquidity Ratios , activity Ratios , leverage Ratios , profitability Ratios , and market value Ratios . For liquidity, the following Ratios were used: current ratio; quick or acid-test ratio; cash flow liquidity ratio; average collection period; and days payable outstanding.

3 For activity, the following Ratios were used: accounts receivable turnover; accounts payable turnover; fixed assets turnover; and total assets turnover. For leverage, the following Ratios were used: debt ratio; debt to equity ratio; and times interest earned. For profitability, the following Ratios were used: operating profit margin; net profit margin; return on total assets; return on equity; and basic earning power ratio. For market value, the following Ratios were used: price-earnings ratio; market-book ratio; and dividend yield. Imploring a Comparative approach, this research paper also seeks to come up with benchmark figures that will be useful for other firms (not publicly- Listed ) belonging to the education subsector.

4 To do this, Financial statements of CEU, FEU, and Malayan for the indicated periods were obtained from the Philippine Stock Exchange (PSE) website. Necessary information derived from these Financial statements were summarized and used to compute the Financial Ratios for the three-year period. To provide a basis for Analysis , for each Financial ratio, the firm adjudged as the best one (using rule of thumb and ratio trends) was given three points, the next one, two points, and the last one, one point. The total points for each ratio category were then computed to arrive at an overall basis for Analysis . Results showed that in terms of liquidity, FEU ranked first, followed by Malayan, then CEU; in terms of activity, FEU ranked first, followed by CEU, then Malayan; in terms of leverage, Malayan ranked first, followed by CEU, then FEU; in terms of profitability, FEU ranked first, followed by Malayan, then CEU; and in terms of market value, CEU and FEU tied for first and then Malayan followed.

5 Overall, FEU (44 points) ranked first, followed by Malayan (40 points), then CEU (36 points). Keywords: activity Ratios , education, Financial statement Analysis , leverage Ratios , liquidity Ratios , market value Ratios , profitability Ratios . 1. Introduction Beyond crunching and depicting numbers in the Financial statements, the primordial goal of Financial management is creating wealth. Wealth creation is best achieved by maximizing firm s value through optimal usage of resources over a long period of time. In other words, it is the continuous and sustainable accumulation of more assets (growth) as time passes by. Putting these into perspective, wealth creation is a factor of a series of sound business decisions, made one after the other, that originate from structured or scientific basis.

6 As risks are the ones that prevent any firm from achieving its objectives, coming up with structured and scientific bases of decisions reduces the likelihood of the former (risks). In Financial management, one of these structured and scientific bases on which firm decisions are anchored is the Financial statement Analysis . Centre for Promoting Ideas, USA 174 According to Drake (2010), Financial statement Analysis is the selection, evaluation, and interpretation of Financial data, along with other pertinent information, to assist in investment and Financial decision-making. Moreover, it is also the process of identifying Financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account (accounting for management website).

7 One of the tools in Financial statement Analysis is Financial ratio Analysis . As Financial statements are usually lengthy, it will be more efficient and strategic to just pick up the figures that matter and plug them in pre-defined formulas developed through time by finance and accounting scholars. One of the sectors of business that draw the special attention of Financial analysts today is the education sector, specifically higher education. As studied by Johnstone (2009), the financing of higher education throughout the world has seen dramatic changes in the last decades of the 20th and the first decade of the 21st centuries. These changes in financing are responses to a worldwide phenomenon of higher educational costs tending to rise at rates considerably in excess of the corresponding rates of increase of available revenues, especially revenues that depend on taxation.

8 As a result, the consequences and trends in financing higher education have been the increasing unit, or per-student, costs of instructions, the increasing enrollments, the increasingly knowledge-based economies and the consequent additional expectations heaped on higher education to serve as a major engine of economic development and individual betterment, the failure of governmental, or public, revenues to maintain their share of the cost increases resulting from these pressures on higher educational expenditures, the trend toward increased globalization, which contributes both to the increasing cost trajectories and to the faltering governmental revenues, and the pattern of increasing liberalization of economies and the resulting decentralization, devolution, and privatization of public and private systems, including institutions of higher education (Johnstone, 2009).

9 Given such awareness, it is just high time for the education sector to be subjected to the rigors and benefits of Financial ratio Analysis . Focusing on Listed higher education institutions in the Philippines, the researcher though of coming up with a Comparative Analysis , in the hope of determining and explaining the present Financial health of firms belonging to higher education subsector, providing the subsector Financial figures to be used for benchmarking, and highlighting opportunities for improvements. Objectives of Financial ratio Analysis Before starting the Analysis of any firm s Financial statements, it is necessary to specify the objectives of the Analysis . According to Fraser and Ormiston (2004), the objectives will vary depending on the perspective of the Financial statement user and the specific questions that are addressed by the Analysis of the Financial statement data.

10 Among the several perspectives are that of the creditor, the investor, and the management. Each of these stakeholders would have to have questions that need to be answered. For instance, a creditor is usually concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds. The investor usually attempts to arrive at an estimation of a company s future earnings stream in order to attach a value to the securities being considered for purchase or liquidation. Lastly, Financial statement Analysis from the standpoint of management relates to all of the questions raised by creditors and investors because these user groups must be satisfied in order for the firm to obtain capital as needed.


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